Will your new business sink or swim? New businesses have a horrible death rate. There are certain start up mistakes when you buy or open a business than can be fatal to success.
Among the very worst start up mistakes when you buy or open a business are under capitalization, inexperience, and paying too much for an existing business.
Inadequate capitalization means that you don’t start out with enough money. It is a classic cause of business failure. Especially in new businesses. Here’s why. Start up costs frequently exceed your most liberal projections. The maze of business regulations and the necessary building and safety permits are a nightmare. The more you didn’t know about, the longer it takes to get your doors open. Meanwhile, you are paying rent for business space that you can’t use.
Start up mistakes when you buy or open a business – Anatomy of a restaurant failure.
Here’s a case in point, concerning restaurant failures. I have a friend who owned a small family style Los Angeles restaurant. After a number of years, his lease expired. The landlord would not renew it without a huge rent increase. My friend decided to move. He leased space in a shopping center. The space he took had never been a restaurant. He is an experienced
restaurant operator. But many new regulations had taken effect since the last time he opened a restaurant. Everything at his original restaurant had been “grandfathered” in because he bought it as a going concern.
He was shocked to find out that his new space required expensive plumbing modifications he was unfamiliar with. That cost an extra $25,000. Then there were ADA disabled persons compliance and other improvements that he had not expected. That made the cost of bathroom remodeling jump by $20,000. He ran out of money before he ever got the doors open. He had investors who trusted him. Needless to say, the silent partners were furious. But he finally got it open. To do so he used up every last cent of his available credit. Even his kid’s piggy bank got tapped to buy last minute supplies. He was open, but had no cash left.
His debts piled up beginning the day he opened. Purveyors were never paid on time. Even sales taxes and payroll taxes were ignored. He stopped paying rent. There just was no money. He and his wife divorced. And three years later he was out of business and being sued by the landlord for back rent. But during all this, there was one thing he never stopped doing. He never stopped digging himself into a deeper hole.
Here’s a few things to know if you want to buy a business.
Experience counts. You are asking for trouble if you start or buy a business without significant experience. If you buy a business, don’t assume that the old owner can teach you everything there is to know. Many business sellers will actually lie to you about their business income. It’s an old scam. The seller of a cash business claims he has two sets of books. The seller tells you there is significant cash income that goes unreported. The unreported income is not on the books. But the seller is asking for a price based on the “unreported” income. If you are a buyer, don’t walk away from that deal. Run from it. Run as fast as you can. Ordinarily, the buyer will have legal recourse against a seller who commits fraud by overstating the income. But if you are that buyer, are you REALLY going to sue because they buyer misrepresented the amount of taxes that you can evade? Your lawsuit won’t go very far.
What to do if your business is already in trouble.
Bankruptcy may save a small business on the verge of closing. Even if the business can’t be salvaged, personal bankruptcy may give you a fresh start to get you back on your feet. You won’t go very far in life saddled with old debts. Bankruptcy can sometimes allow a small business to eliminate debts. It can also allow a business to reschedule secured debts and delinquent taxes. Most bankruptcy lawyers will give you a free consultation. Do your homework. Find one or more lawyers to consult who have many years of experience. The accompanying short video lets you hear the normal questions and answers that usually are discussed during an initial bankruptcy consultation. The video features Jeffrey Wishman, a Los Angeles bankruptcy lawyer with 33 years of experience.